DBRS Confirms Belfius SA/NV’s Senior Debt at A (low); Trend Stable

DBRS Ratings Limited (DBRS) has today confirmed the Issuer Rating, as well as the Senior Long-Term Debt & Deposits ratings of Belfius Bank SA/NV (Belfius, or the Group) at A (low) with a Stable Trend. The Short-Term Debt & Deposits rating was also confirmed at R-1 (low) with a Stable Trend. The Long Term Critical Obligations rating was confirmed at A (high) and the Short Term Critical Obligations rating was confirmed at R-1 (middle), both with a Stable Trend. The Subordinated Debt remains at BBB (high) Under Review with Negative implications (see: “DBRS Places Certain Sub Debt of 27 European Banking Groups Under Review With Negative Implications”). Please see a full list of ratings at the end of this press release.

The ratings reflect the Group’s well-established franchise in financing Belgian public-sector entities and in retail banking, strong capital and liquidity position, stable funding underpinned by customer deposits, and a low credit risk profile. Belfius made significant progress in de-risking and downsizing the legacy portfolio inherited from Dexia in 2011, which is also reflected in DBRS’s ratings. Franchise diversification is constrained by the Group’s focus on the domestic market while earnings power, while improving, remains modest, due to the Group’s loan mix.

Belfius is among the four large banks in Belgium with 13% market share for saving accounts and 15% for mortgage loans. It also has a market share of around 6% in Belgian insurance, 7% in the life segment and 5% in the non-life segment. The bank’s core franchise is focused on retail, SME and mid-cap customer segments. Reflecting its origins, Belfius holds the leading position in public sector banking in Belgium, in particular in lending to local governments and public/project finance. Belfius is also a leading player in arranging bond issues for Belgian issuers. The Belgian state which currently owns 100% of Belfius has started to consider a partial privatisation of the Group while remaining the majority shareholder. Following this, the Board of Directors of Belfius decided unanimously on April 21, 2017 that they were in support of the government privatisation plan, preferably by listing a minority stake of the Bank through an IPO.

Belfius’s revenue generation is impacted by its specialisation in the low margin public finance business and a relatively significant contribution of net interest income, which remains under pressure in the current low rate environment. The management strategy has been to expand the higher-margin lending to Belgian corporates and to grow bank-insurance cross-selling. In 2016, The Group reported net income group share of EUR 535 million in 2016, up 6% year-on-year (YoY). The Group’s revenues were EUR 2,259 million, up 4% YoY mainly due to the strong increase in the result on investments. Net interest income declined by 4%, as margin pressure more than offset the positive impact of healthy expansion in loans (+6%) and deposits (+3%). Costs remained under good control, declining by 2% YoY to EUR 1,366 million. With the core business’ cost-to-income ratio at 57% in 2016 and 60% in 2015, efficiency is broadly in line with peers. Cost of risk increased by 25% to EUR 116 million, driven by a specific impairment in the legacy portfolio. Despite this, the cost of risk remains very low, absorbing a moderate 12% of IBPT in 2016. In the core business, the cost of risk stood at 10bps in the Retail & Commercial business line and 7bps in Public & Corporate in 2016.

DBRS views Belfius’ risk profile as low, benefiting from a moderate appetite for risk, a loan portfolio dominated by high quality exposures, and steady progress in the de-risking of the legacy portfolio inherited from Dexia since 2011. During 2016, the Group’s non-performing loan ratio deteriorated slightly to 2.54% from 2.29% at end-2015, due to specific impairment charges related to U.S. RMBS in the legacy portfolio. Despite this, asset quality compares favourably with that of the Group’s European peers. Asset quality is supported by low risk retail exposures (25% of credit risk at the Group level), which in large part consist of Belgian mortgages, and loans to public entities (29%). While credit impairments remain low, the geographical diversification is limited with Belgium representing 70% of credit risk exposures.

During 2016, Belfius continued to downsize its legacy portfolio. At end-2016, the outstanding legacy bonds were EUR 6.3 billion, and legacy credit guarantees were EUR 4.2 billion, both declining by around 20% YoY. The legacy bond portfolio at end-2016 represented 28% of the total investment portfolio and around 7% of gross loans and advances.

Belfius has successfully rebalanced its funding profile taking advantage of the strong and stable deposit base in Belgium. Customer funds, predominantly retail, represented 78% of the bank funding sources at end-2016. Belfius is an active issuer of covered bonds, backed by mortgage loans and by public sector loans. The loan-to-deposit ratio of the commercial (i.e. core lending) banking balance sheet was a healthy 90%, down 1% YoY.

Despite a relatively high level of encumbered assets (22.5% of total bank balance sheet and collateral received under securities format), the Bank’s liquidity position is robust with an available liquid asset buffer of EUR 32.4 billion, almost five times the outstanding short term wholesale funding. Belfius posted a Liquidity Coverage Ratio (LCR) ratio of 127% and a Net Stable Funding Ratio (NSFR) of 110% at end-2016.

Belfius has continued to strengthen its capital buffer in recent years, mainly through consistent earnings generation, a reduction in risk-weighted assets, and also the favourable variation of unrealised losses on the AFS bond portfolio. DBRS views Belfius’s banking solvency ratios as strong. At end-2016, Belfius’ Basel III fully-loaded Common Equity Tier 1 ratio reached 16.1%, up 123 basis points (bps) from end-2015 (based on Danish compromise). Belfius’ fully loaded leverage ratio was 5.3% at end-2016 compared to 4.9% at end-2015, and its fully loaded total capital ratio was 18.4% compared to 16.2% last year. The Fully Loaded Total Capital ratio increased strongly to 18.4% from 16.2% at end-2015 thanks to an inaugural EUR 500 million bullet Tier 2 issue with a 10-year maturity. The phased-in CET 1 ratio under the Danish compromise was 16.6% at end-2016, well above the targets set by the ECB at 9% for the 2017.

DBRS notes that Belfius’s capital ratios benefit from relatively low RWA density in its central government and public sector lending. At the same time, they reflect the National Bank of Belgium’s macroprudential measure increasing the risk weights on Belgian residential real estate exposures under the internal ratings based (IRB) approach by 5%. Given the strong capital position, Belfius paid its inaugural dividend, equivalent to 15% of the 2015 net profit. The proposed dividend payout from the 2016 profit increased to 40%.

RATING DRIVERS

DBRS does not anticipate a potential partial privatisation of Belfius to have any rating implications at this stage.

Upward movement in the senior ratings could occur if Belfius were to significantly improve overall levels of profitability while at the same time maintaining a low risk profile and downsizing its legacy portfolio further.

Downward pressure on the IA is not expected, but could occur if Belfius were to significantly increase its risk profile or suffer from a material deterioration of its franchise or earnings generation.

Notes:
All figures are in Euros unless otherwise noted.

The principal applicable methodology is the Global Methodology for Rating Banks and Banking Organisations (July 2016). Other applicable methodologies include the DBRS Criteria: Critical Obligations Rating Criteria (February 2017), Support Assessments for Banks and Banking Organisations (March 2017) and Rating Bank Capital Securities – Subordinated, Hybrid, Preferred & Contingent Capital Securities (February 2017). These can be found can be found at: http://www.dbrs.com/about/methodologies

The sources of information used for this rating include SNL Financial and company disclosures, the National Bank of Belgium and the European Central Bank. DBRS considers the information available to it for the purposes of providing this rating to be of satisfactory quality.

This is an unsolicited rating. This credit rating was not initiated at the request of the issuer. This rating included participation by the rated entity or any related third party. DBRS had no access to relevant internal documents for the rated entity or a related third party.

DBRS does not audit the information it receives in connection with the rating process, and it does not and cannot independently verify that information in every instance.

Generally, the conditions that lead to the assignment of a Negative or Positive Trend are resolved within a twelve month period. DBRS’s outlooks and ratings are under regular surveillance

For further information on DBRS historical default rates published by the European Securities and Markets Authority (“ESMA”) in a central repository, see:
http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml.

Ratings assigned by DBRS Ratings Limited are subject to EU regulations only.

Lead Analyst: Tomasz Walkowicz – Vice President - Global FIG
Rating Committee Chair: William Schwartz - Senior Vice President, Global Credit Policy
Initial Rating Date: December 5, 2007
Most Recent Rating Update: March 7, 2017

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